Safety nets and tax reform

The proposed second part of the programmed Comprehensive Tax Reform Package (CTRP) has been tweaked, perhaps too calculatingly, so as not to affect revenue collections of government.

Like the first package, which came into effect on the first day of this year, the second package carries two parts: the first half will gradually reduce corporate income taxes (CIT) to 20 percent over a decade or so, while the second part will generally reform the existing fiscal incentives to plug leaks and improve revenue collection.

Reducing the CIT rate is expected to result in about P62 billion in revenue losses a year for every one percent decrease, and thus, when fully achieved, is estimated to cost the state more than half a trillion pesos annually.

The country’s economic managers, of course, would want to be more conservative when giving up revenue streams, especially when there are extraordinarily huge expenditures planned, such as the P1-trillion Build Build Build infrastructure program.

First package lapses

In the CTRP’s first installment, which reduced personal income taxes for about five million working Filipinos, the corresponding loss in state revenue collections was more than compensated by the increased levies on fuel, alcohol and tobacco products, and other new taxes.

It is unfortunate that crude oil prices in the world market almost doubled in the first months of this year, thus weighing heavily on the new excise taxes on fuel products, and that the US dollar strengthened correspondingly to weaken the peso at a time when there is a surge in importations for the BBB program.

These developments, plus the uncertainties of a trade war between China and the United States and the regained vigor of the US economy in the international arena, and the dilly-dallying posture of our government officials which led to a disruption in basic food supplies, have led to a prolonged bout of higher inflation.

Yes, we’re paying for these quite dearly after seeing several international multilateral financing institutions calling for a revised downward economic growth projection for the Philippines. If it’s any consolation, many other countries in this part of the world are similarly affected.

Second package potential pitfalls

In the current march to get the second CTRP moving, government economic planners may have fallen into pitfalls that could derail (once again?) its touted benefits to the country.

The Lower House recently passed its version of the CTRP’s second part, which is closely modeled to the finance department’s proposal. The CIT rate will be gradually lowered over a period of nine years, from 2021 to 2029, by two percentage points every two years.

The gradual lowering may be too slow to become effective, especially since the Philippines is coming from an already uncompetitive level where its CIT is currently rated as the highest in the region vis-à-vis the average 21.9 percent of our nine ASEAN neighbors.

Besides, even before the decade ends, some of our competitor countries may be lowering their CIT offering in recognition of a further tightening in the global race to attract overseas investments and the value of keeping the business environment even more robust.

Thus, in the Lower House’s proposed law, now famously called the Tax Reform for Attracting Better and Higher Quality Opportunities (TRABAHO) bill, the reduction in CIT rates will likely not make a blip in government’s revenue capability – but will also not likely positively impact on the economy’s ability to attract investors.

Not a catch-up game

The lost revenues for the government of the proposed two-percentage point lowering of CIT in 2021 is expected to be minimal, at just 1.5 percent of government revenues, but this could turn out to be a penny-wise, pound-foolish move.

Playing a catch-up game on CIT incentives in a period of over a decade may be too long a move, even too conservative. It may not be a risk in terms of drastically reducing government revenue collections, but it may not also bring any benefits.

More importantly, the effect of the proposed reform on fiscal incentives that will likely be in effect years before the first reduction CIT levels will happen will already act as a disincentive for new investors, and even for those currently operating in the country.

Definitely, any planned catch-up game is not going to happen.

Other ways to attract investors

The government’s economic team may very well need to rethink their strategy, which looks good on an Excel sheet, but may lack the safety nets that can provide flexibility of dealing with unknowns.

There are other ways of attracting investors to the country. Investors tend to look more at how the government is committed to helping businesses operate efficiently. More attention is needed to cast away the shadows of red tape and corruption, and too much political interference in business.

The country has not been able to make headway in improving its competitive landscape on these aspects for too long, and it is high time that such concerns are quickly dealt with to become assets, not deterrents, to economic productivity.

We need to reduce corporate income taxes, just as a judicious reform in the current fiscal incentive environment is needed. The BBB program has to be given more attention, now that China is battling its own problems because of its trade war with the US.

New tax revenues from higher levies on alcohol and cigarettes, as well as the proposed review of real property taxes will come in handy. But again, these are not always main determinants attracting more investors, and the road for a healthier economy.

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